After dropping another multibillion-dollar rescue, it’s time Wall Street and the Federal Reserve address the elephant in the room.

All We Are Saying

Ev’rybody’s talking ’bout revolution, evolution, regulation, meditations, United Nations…

But all the Federal Reserve is saying is give quantitative easing (QE) a chance. Actually, the Fed isn’t saying that … directly, anyway. (Sorry for the poor lead-in, John.)

Today, Federal Reserve Chairman Jerome Powell held U.S. interest rates steady and promised to keep lending markets stable. Practically everyone on Wall Street expected this, and practically everyone is talking about steady interest rates.

However, what few are talking about is the fact that the Fed just flooded the repo market with $70.2 billion in temporary liquidity. This is at least the fourth time the overnight lending market (aka the repo market) has created enough of a stir to gain Great Stuff’s attention. And if it’s getting my attention, it should get yours.

The repo problem first reared its ugly head back in September, when the Fed dumped $128 billion into the repo market to stabilize liquidity for bank reserves. Wall Street brushed the occurrence off like it was no big deal.

But it happened again in October, prompting the Fed to establish a program to provide $60 billion in liquidity per month to address the problem.

And, as you already know, that $60 billion wasn’t enough. This time, the Fed needed to drop $70.2 billion in temporary lending funds into the market.

The problem here is that if the repo market dries up, there is no “lender of last resort” to financial institutions, hedge funds and, apparently, publicly traded real estate investment trusts (REITs).

But while REITs got a bad name following last month’s revelation on AGNC, a recent study by the Bank for International Settlements indicates that big banks and hedge funds are more to blame. With banks concentrating more of their holdings in U.S. Treasurys, it’s limited “their ability to supply funding at short notice in repo markets,” the report said.

The Takeaway:

The time for downplaying the repo market’s woes is gone. The Fed’s balance sheet has ballooned to $4.07 trillion from bailing out the repo market. That’s no small feat.

Something is seriously — possibly systemically — wrong with the financial markets right now … and the Fed is running around like a cartoon character on a sinking ship, plugging holes with its fingers.

What’s more, the problem isn’t limited to the U.S. Issues are now becoming apparent in Europe’s $9 trillion repo market.

Nobody likes the term quantitative easing (QE), but when the Fed dumps billions into the market to rescue financial firms, what else would you call it?

It’s time Wall Street and the Federal Reserve address the elephant in the room. Something is decidedly wrong. A large financial institution — maybe a large bank or hedge fund — or two (or three) is in trouble. Right now, we’re putting Band-Aids on the problem, hoping it’ll go away.

It won’t. There’s a reason why Credit Suisse believes that the Fed will need to launch a “QE4” to help shore up the repo market’s cash crunch. And the sooner we find out what that is and address it, the better.

The Good: The Wearables Wonder

Apple (AAPL) gets dual target increases on AirPods.

I don’t get the wearables market. Specifically, things like Apple Inc.’s (Nasdaq: AAPL) AirPods and Apple Watch do nothing for me. I haven’t worn a watch since I got a smartphone, and I have a set of Bluetooth earbuds that I paid less than $30 for.

Clearly, I’m not Apple’s target market. But while I might be a curmudgeon when it comes to wearables, the market is reportedly huge. Both Bank of America and Evercore ISI lifted their price targets on AAPL shares today — BofA from $270 to $290 and Evercore to $305 from $275.

Both ratings firms cited strong demand for AirPods and the Apple Watch. Both cited strong margins on Apple’s wearables products, with favorable sales figures sure to come out of the holiday season. Both also noted low expectations for the iPhone 11, stating that the iPhone would outperform this year.

Personally, I’m more hyped about the growth in Apple’s services business … but not hyped enough to recommend buying the stock just yet.

The Bad: Down on the Depot

Home Depot (HD) has some guidance explaining to do.

Home Depot Inc. (NYSE: HD) is holding its analyst day tomorrow, and the company decided to get out in front of the event to set expectations.

Unfortunately, there appears to be a bit of a disconnect between HD and analysts on this front.

Home Depot says it expects 2020 sales growth of 3.5% to 4%, same-store sales growth of 3.5% to 4% and operating margins of 14%.

Analysts, however, expect 2020 sales growth of 4.4% and same-store sales growth of 4.3%. Kind of a bummer, right?

Investors think so, and HD shares are down nearly 2% as a result. Home Depot will have some ’splaining to do at tomorrow’s event.

The Ugly: Nothing but Netflix No Longer

Will Netflix (NFLX) bow to Baby Yoda?

The Walt Disney Co. (NYSE: DIS) launched Disney+ and is revamping Hulu. Viacom and CBS completed the merger to become, well, ViacomCBS Inc. (NYSE: CBS) and is backing Pluto TV hard. Even Apple’s Apple TV+ is gaining traction.

The streaming world just got a lot more complicated for Netflix Inc. (Nasdaq: NFLX). The OG content streamer is still king of the market, but everyone is gunning for the top. And they’re doing so with much lower prices than Netflix.

Because of this, Needham analyst Laura Martin downgraded NFLX to underperform this week. Martin believes that Netflix will lose 4 million U.S. subscribers in 2020 due to these lower-cost competitors. To offset the competition, Martin said that Netflix needs to launch a lower-cost subscription option and consider supporting this tier with ads.

The lower-cost plan isn’t a bad idea, but ad support will turn many subscribers off. I know that I cut the cord to both lower my costs and get rid of ads. I pay for the higher-tier Hulu plan just to avoid ads.

I still remember that time long, long ago when there were no ads on cable TV. (Anyone else remember that?) I hated when they started appearing on cable. I paid for the service, not for the ads. It’s the same with streaming. Start putting ads in my streaming, and I’ll find somewhere else to spend my money … or go the free route with Pluto TV. (Seriously, ViacomCBS is onto something big here.)

That said, if Netflix does lose 4 million customers next year, it may have no other choice but to follow Martin’s suggestions.

Great Stuff's Comic CornerThere’s so much Great Stuff out there today that we’re giving you a two-for-one deal on funny today. (This is getting out of hand; now there are two of them!)

People familiar with the matter.

Aah … a throwback to the infamous “people familiar with the matter.”

SEC Warning Tweet

Umm … thanks, SEC? I don’t know if it’s funnier that the SEC tweeted this or that it really should be taken as serious advice.

Great Stuff: Help Your Friends Make Billions!

Great Stuff Your Friend

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I don’t blame you. If I had a financial e-zine with a trading chart that could help me make billions, I’d keep it quiet too.

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Where’s your holiday spirit?

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So, if you have a friend who still gets their daily financial news in that dry, Waspy old format from the major financial publications, forward them today’s copy of Great Stuff.

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Until next time, good trading!


Joseph Hargett

Great Stuff Managing Editor, Banyan Hill Publishing